Paul Glass, director of Devon Funds Management, told the New Zealand Shareholders’ Association (NZSA) conference that Fonterra, the world’s largest dairy exporter, had NZ$7bn (€3.9bn) of debt and less than $1bn of earnings.
He said: “Most banks will only lend three to four times’ earnings. Fonterra is very heavily indebted.”
Farmers’ debt had also risen significantly in the past 12 years to about $35bn, with an average farmer holding having $90 of debt per kilo of milk solids, according to Glass.
Given that the farmgate milk price is likely to be about $4/kg milk solids this season – on an optimistic forecast – he said this is a high level of debt versus revenue, let alone earnings.
Economist Shamubeel Eaqub told the conference that Fonterra’s forecast fargate milk price of $3.85/kg was the lowest ever in real terms and, combined with the downturn in the Chinese economy, was a very big deal for New Zealand.
He questioned why Fonterra took on so much debt ahead of the massive downturn in commodity prices and why it had not seen it coming.
He also questioned why Fonterra has not delivered the value it should have to unit holders in the company.
Fonterra has forecast a dividend to shareholders, including unitholders, in the range of 40c to 50c for this season, reflecting the lower input cost of milk on the value-added goods it produces.
Eaqub said that the low-inflation, low-interest-rate environment investors now face is likely to continue for a long time, due to excessive capacity in the global market and the effect of faster technological change than ever before.
He said: “I’m confident inflation is not the devil to fear, deflation is more of a concern. The growing youth unemployment and hollowing out of the region – those are the risks that public policy, government and investors have to be mindful of.”
Source: FarmersJournal
